Will 3D Systems Fall Prey To The Competition?

3D printing technology has gathered a lot of steam in the past few years. Investors who had invested in companies such as 3D Systems (NYSE:DDD) earlier are now sitting on big gains. 3D Systems has seen terrific growth in the past, but will it continue doing well with competition from Stratasys (NASDAQ:SSYS) and Hewlett-Packard (NYSE:HPQ)?

With growing competition and bigger players venturing into 3D printing, it seems like the honeymoon period for 3D Systems is over. Although the market for 3D printing is predicted to be worth $8.41 billion by 2020, it seems like 3D Systems is running out of fuel due to the following reasons.

Increased competition

2014 will witness the expiry of various patents related to 3D printing. This will give birth to various new 3D printer manufacturers and Hewlett-Packard is one of them. The expiry of patents means new companies save on royalty costs and research and development for innovating new 3D printers.

One can certainly see tough competition, as every company wants to have a bigger bite of the 3D printing market. Hewlett-Packard is one of the companies looking to establish its hold in 3D printing in 2014.

HP is a known brand among customers globally, and has an established marketing network. HP is all set to embrace the 3D printing business and is planning to launch 3D printers which are more cost effective with higher speed. These features will give HP an advantage over 3D systems.

The main area of HP's interest is industrial, where speed is an important factor for productivity and HP would be favored over 3D Systems. 3D Systems has a slight advantage in the home consumer segment as it has a few models targeting the consumer market. But 3D Systems needs to be aware of the fact that various Chinese manufacturers are also stepping in and stiff competition is on its way in the consumer market.

In addition, HP has a global marketing network which is much bigger than 3D Systems, which should give it a huge advantage when it launches its own products.

Another company which poses a threat to 3D Systems is Stratasys, the second-largest company in the segment. Stratasys' Objet30 OrthoDesk 3D printer is already one of the most preferred 3D printers in the digital dentistry market. The market for dental lab equipment was valued at $5.5 billion in 2011, and is expected to grow at a CAGR of 4.7% from 2012 to 2018 to reach $7.6 billion in 2018. So, Stratasys is making a move in the right market.

The advantage of Stratasys' Objet30 OrthoDesk 3D printer is its cost effectiveness and ease of use, which fits in the budget of a small-size dental lab. As compared to printers from 3D Systems Objet30 OrthoDesk provides increased production capacity by eliminating bulky storage space of the printers.

HP's financial position

Financially, HP has a strong cash reserve of $12 billion. This can be an advantage for HP as it will have the necessary resources to develop a low-cost, high speed 3D printer. Last year, HP spent $3.4 billion on research and development. So, once HP enters into the 3D printing market, it will be able to allocate a big research budget for innovating 3D printers and this may create trouble for 3D Systems. The bottom line is that HP will become the largest company making 3D printers in terms of market cap, and it will have pockets deep enough to even acquire 3D Systems.

Price war

Price has always been an area of concern for any product's acceptance and its success. So, another area of concern for 3D Systems when it comes to pricing is the news of bigger players like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) entering the 3D printer business. This can further intensify the price war that 3D Systems may face with these giants stepping into this segment. The cash reserve of these big players can always hit companies like 3D Systems in the price wars.

Also, Chinese manufacturers have always been tough competitors. A Chinese manufacturer, TierTime Technology, is one of the largest manufacturers of 3D printers in Asia and the third largest in world. The company aims to be the leader in 2014 and hurt 3D System's business.

Conclusion

3D Systems has run up almost 70% in the last one year and has a steep P/E of 166. The company is facing competition from all sides and so I think it would be best for investors to stay away from it. The advent of HP and Chinese players, along with the expiry of patents, can erode 3D Systems' advantage in the industry, and so investors shouldn't buy it anymore for their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.